Profits at HBOS have plunged more than 70% this year, illustrating the impact of the deepening credit crunch on the country's biggest mortgage lender.

As the bank reported £848m of first-half profits, chief executive Andy Hornby painted a gloomy outlook for the next 18 months, when he expects house prices to fall by 18%.

Hunkering down for slowing economic growth, HBOS is considering "selective asset disposals" and forcing through price rises to home owners in a market Hornby expects to shrink even further. HBOS is aiming to attract savers as it can no longer raise funds on the capital markets damaged by the credit crunch. It is also scaling back its treasury operations, including closing down its £18bn Grampian vehicle.

The profits, which fell in line with those reported by Lloyds TSB this week, took a £1.1bn hit from investments hurt by the credit crunch and £700m from its insurance arm. They were better than the market had expected, which along with the fact there were no nasty surprises, helped the shares to be the biggest risers on the FTSE 100. They ended 7% higher at 290.5p, above the 275p at which the bank's recent fundraising was priced.

Analysts believe the bank is facing tough times. Bruce Packard, analyst at Pali International, said: "We forecast the earnings are going to go backwards for the next couple of years."

Hornby gave few clues about which assets the bank may sell off barely a week after raising £4bn by selling new shares to investors. Speculation focused on its Australian and Irish operations. Hornby said there were "no sacred cows" and that there would be no forced sales. There has been speculation that HBOS itself could receive a takeover offer.

Hornby has not considered resigning, despite support from only 8% of shareholders for the cash call. "I accept that the rights issue was a very tough process," he said. "I'm extremely glad we've done it."

The cash call has given the bank a core tier one ratio of 6.5% - higher than many of its rivals. But as a result it has been forced to pay its interim 6.1p dividend in shares. The dividend was 16.6p in the same period last year. It intends to pay the second-half dividend in cash and is looking for a payout ratio of 40%.

The bank admitted that its provision to cover customers getting into difficulty with payments had risen by 36% to £1.3bn. Arrears in its mortgage arm Halifax were rising off an historically low base as were provisions to its corporate customers and it expects "upward pressure" on these provisions for impairment losses as economic conditions deteriorate.

Bad debts from customers failing to make mortgage payments on time jumped to £213m from £40m. Half of the provision was caused by the fall in house prices in the first half and is likely to be of a similar level in the second half.

In the mortgage market, where its Halifax arm traditionally has a 20% share, its share of net lending was only 7% - compared with Abbey's 26% and the 24% reported by Lloyds - reflecting its determination to chase only profitable business.

Net lending stood at a similar level in the same period last year, but in the second half its net lending share had been 22%. Halifax's share of the gross mortgage market, which is purely new business, was 19% - identical to the same period last year.